Consumers typically purchase products or subscribe to services from businesses who they perceive to be offering the best products or services at the lowest price. And while consumers are often loyal to providers and brands they are familiar with, they will surely shift allegiance if they believe they can obtain better products or services or a better price somewhere else. Established ongoing relationships with existing customers can be a significant source of revenue for many businesses losing customers to competitors can significantly cut into a company's revenue. Managing this phenomenon, taking active steps to prevent customer “churn” is a high priority for many businesses.
In many cases it is less expensive for a business to retain existing customers than to acquire new ones. For this reason many companies will go to great lengths to maintain their existing customer base. In highly competitive industries it is common for companies to implement elaborate customer loyalty programs or aggressive customer retention programs to prevent or limit churn. Such programs may offer incentives to customers to entice them to continue buying the company's products or services or they may simply provide some personalized contact or message to existing customers to reinforce and strengthen the relationship.
Designing an efficient and effective customer retention program can be difficult, especially when confronted with a large diversified customer base. Companies may not know whether churning is a significant problem or not. And if it is, which customer groups are most likely affected. Furthermore, a company's tolerance threshold for churn may be very low. Customer churn may be considered a problem even though it may only affect a small percentage of the overall customer base. Contacting all customers during a customer retention program is too expensive and inefficient. However, contacting too few customers could result in a failure to contact many customers who are likely to churn and who are the appropriate targets of the customer retention program. Deciding who to contact, represents a significant obstacle to preparing an effective customer retention program.
Ideally a customer retention program will contact the maximum number of potential churners with the fewest total number of customer contacts. This point is illustrated in the graph 10 of FIG. 1. The horizontal axis represents the percentage of the total customer population from 0-100%. The vertical axis represents the percentage of customers who will in fact churn. In this example churners comprise 5% of the overall customer base. A first curve 12 shows the results of randomly contacting all existing customers. Since churners only make up 5% of the total customer population, churners can be expected to comprise approximately 5% of any truly random sample of the customer population regardless of the size of the sample. Under these circumstance 100% of the customer population must be contacted to ensure contacting 100% of all churners. 75% of the total customer base must be contacted to reach 75% of the churners, and so forth. Because of the relatively low percentage of churners, a large number of customer contacts are wasted on customers who will not churn. In other words excessive number of non-churners must be contacted in order to the reach a meaningful number of churners. The inefficiency of this method is apparent.
A second curve 1A represents the ideal situation in which the identity of all future churners is known. In this case only churners need be contacted. No contacts be wasted on non-churners since churners comprise 5% of the total customer population, 100% of all churners can be contacted by contacting only 5% of the total customer population. Obviously, contacting only known churners is a far more efficient mechanism for reaching significant numbers of churners than by contacting customers at random. Unfortunately, the identity of customers who will churn are not known in advance, and it is not realistic to put together a customer retention target list that includes only the names of those customers who will assuredly churn in the near future.
A third curve 16 represents an attractive targeting profile for a customer retention program. While it is impossible to determine in advance which customer will churn, it is possible to determine with some degree of accuracy, which customers are more likely to churn than others. In this case, customers who are more likely to churn are targeted first. Predicting who will churn and who will not churn is not a precise science. Some customers may be contacted who have not churned and some customers who will end up churning may not be. Nonetheless, the over all affect is a significant improvement in the targeting efficiency over the randomly selected method 302. As can be seen, the shape of curve 306 approximates the shape of the ideal curve 304. Approximately 70% of all churners may be contacted by contacting only 10% of the total customer population (a significant improvement over the random contact method in which 70% of all customers would have to be contacted to reach 70% of churners). A good targeting profile will have a very steep initial rise, indicating that most of the customers initially contacted are in fact churners. The key to developing a good targeting profile is accurately predicting which customers are likely to churn and which will not. To make such predictions an intimate and detailed knowledge of the customer base is absolutely essential.